PENNSYLVANIA WORKERS COMPENSATION EXPERIENCE RATING PLAN
Copyright ã 1997
The PCRB is a non-profit corporation formed in 1915 in accordance with the insurance laws of Pennsylvania and is not affiliated with state government. The PCRB's enabling statute specified that classification of employers, underwriting rules, policy forms, loss cost values and rating plans for workers compensation shall be proposed by a rating bureau situated within the state. The PCRB is subject to supervision and examination by the Pennsylvania Insurance Commissioner, who must approve its ability to compile loss costs on an equitable and impartial basis. The PCRB membership is comprised of all insurance carriers, including the State Workers' Insurance Fund ("SWIF"), authorized to sell workers compensation insurance in Pennsylvania.
The PCRB is not to be confused with the Bureau of Workers' Compensation, a division within the Commonwealth of Pennsylvania's Department of Labor and Industry. That agency is responsible for a number of statutorily designated activities, including the conduct of hearings in contested cases involving workers compensation claims and the enforcement of requirements for employers to secure payment of workers compensation benefits for their employees.
Although both the Bureau of Workers' Compensation and the PCRB are often referred to simply as "the Bureau," they are very different and distinct organizations.
WHAT IS EXPERIENCE RATING?
Experience rating is a procedure utilizing past insurance experience of individual employers to forecast or predict future experience. It is a systematic, mathematical method of modifying future premiums by comparing the actual incurred loss experience of an individual insured to the normal or average expected loss experience for that insured's classification(s) during the experience period. The experience rating formula includes a credibility factor, which reflects the degree of confidence placed in the insured's past experience as a predictor of future experience. The greater the employer's past exposures, the more credible the experience and the greater the impact past experience will have in raising or lowering the experience modification.
Under experience rating, insureds that maintained favorable loss levels in prior years receive premium reductions (credit experience modifications), while those with poor past loss experience are charged increased premiums (debit experience modifications). Experience rating relies on the premise that each insured's own past loss history gives a meaningful indication of its probable future experience.
WHY HAVE EXPERIENCE RATING?
Implicit in any form of experience rating is the prospect of both debits and credits. Since experience rating offers the prospect of these premium adjustments, it provides an economic incentive for employers to develop safety programs and claims management initiatives. Thus, experience rating benefits both employers and employees by promoting occupational safety and timely return to work for injured workers. Based on extensive historical testing and actuarial methods, experience rating is the best known method for predicting future experience utilizing past experience.
CHARACTERISTICS OF EXPERIENCE RATING
In workers compensation experience rating the actual business activity and claim losses of the individual employer are evaluated over a period of time, usually three years. This past experience is then compared with the average as reflected in expected loss rates, which apply to the classification(s) applicable to the employer's business. If the employer has better than average loss experience, the employer is awarded an experience rating credit, while poorer than average experience will produce an experience rating debit.
The experience rating formula is more sensitive to loss frequency than to loss severity. As a result, an insured having many small losses can be penalized more than another insured with the same total dollars of losses resulting from fewer, larger claims. There is reason to believe that loss frequency is more susceptible to change by virtue of management's attitudes and other factors, whereas loss severity is more a matter of random chance.
The Experience Rating Plan limits the effect of accident severity on employer rates by placing a flat loss limitation of $42,500 on the claim amount as used in the experience rating calculation for any one accident for every rated employer regardless of size.
HOW THE PLAN OPERATES
Experience rating is a mandatory plan that applies to all insureds that qualify. The experience modifications are not calculated by the insurance carriers but are computed by the PCRB. Experience rating provides a standard measure of employer experience that can be used by all parties to the workers compensation system. The employer's experience modification reflects the loss records of and applies to all businesses under common ownership.
An employer qualifies for experience rating if its audited payrolls or other exposures over a three-year period, beginning four years prior and ending one year prior to the employer's anniversary rating date as established by the PCRB, multiplied by the current PCRB loss costs by classification add up to a total of $10,000 or more. An employer may qualify for experience rating based on as little as one year of experience, provided this $10,000 threshold is met.
For example, an employer with a policy that renews on January 1, 2004 would have an experience period that uses the payroll and loss experience arising under policies for the three years ending January 1, 2003. The next renewal (January 1, 2005) would continue to use the 2002 and 2001 data, while dropping the oldest year of the 2004 experience period (i.e., 2000) and adding a new year (i.e., 2003). This constant updating of experience using a sliding three-year experience period assures a stable historical record for the individual employer, while also using the most recent available loss experience of the employer. In this way, changes in safety programs or operating technology will be reflected in the premiums paid by employers.
Once an employer meets the eligibility requirements for experience rating, the experience rating calculation is done, and the experience modification is published in the form of an Experience Rating Worksheet. Any insurance carrier insuring a given employer must use the experience modification published by the PCRB. The experience modification applies for a period of one year, at which time a new experience modification will be issued for the succeeding year, provided that the employer continues to meet the qualification requirements as set forth above.
EXPLANATION OF CALCULATION AND FACTORS USED FOR EXPERIENCE RATING
A key principle behind experience rating is to provide qualified employers with an adjustment to the average or manual rate based on its own loss experience. This adjustment, however, cannot be based solely and completely on a simple premium-to-loss ratio because the individual exposure and loss experience of some employers may be so small that a reliable adjustment would be impossible to calculate in that fashion.
Accordingly, each risk is assigned a credibility factor based on its total expected losses for the rating experience period. These credibility factors increase as employers' expected losses increase. Expected losses are used to establish credibility because expected losses reflect the amount of business activity and the degree of hazard in an employer's operations. Higher expected losses generally mean that more accurate and reliable rating adjustments can be made based on an employer's own experience.
In addition to the credibility factor, another factor impacting the insured's experience modification is the "limit charge." The limit charge is an additional charge applied to all experience-rated risks in exchange for the provision in the Manual limiting large losses to a maximum value as noted above. This charge is needed because an average provision must be made to recognize those loss amounts being excluded from some employers' experience when applying a maximum limit on the losses used in experience rating.
The limit charge is based on the distribution of Pennsylvania losses by size of claim and represents that portion of expected losses that exceed the applicable maximum.
The Experience Rating Plan also sets specified "swing limits" on the extent to which any employer's experience modification may change in one year. The limit employed is a change (up or down) of 25 percent. A new modification cannot be higher than the expiring experience modification plus 25 percent, nor can it be lower than the expiring experience modification less 25 percent. Thus, for example, if the expiring experience modification was 1.000, the new experience modification cannot be more than 1.250, nor can it be less than 0.750. The swing limit provision provides an extra measure of protection for employers against the possibility of significant changes in experience modification from year - to - year.
With these definitions in mind, the Pennsylvania Experience Rating Plan formula is written as follows:
M = (A x C) + (E x L x C) + E (1.000 - C)
It is important to understand that in order to operate the Experience Rating Plan estimated reserves must be established and, for the most part, be allowed to stand for the experience period to which they apply. To do otherwise would potentially produce an extended series of adjustments up or down in employer rates as individual claim values change with the accumulation of additional information. Carriers generally are precluded from revising loss values between two evaluation dates because of departmental or judicial decision or because of developments in the nature of the injury.
WHEN CAN LOSSES BE REVISED?
Revision of losses between valuation dates is permitted only for the following reasons:
It is permissible to submit a revised loss report requesting adjustment of the affected rating or ratings for any of the above reasons, provided such request is made within 24 months of the expiration of the policy period to which the experience modification(s) applied. Contact the PCRB for information about possible extensions to the 24-month rule.
CAN AN EMPLOYER CONTEST AN EXPERIENCE RATING?
Yes. While almost all experience rating issues are resolved cooperatively between the employer, the insurance company and the PCRB, occasionally issues are encountered in which differences of opinion persist and which have sufficient effect on employers' premiums to merit further review. If the experience rating calculation is disputed with sufficient cause, a comprehensive investigation is performed by the PCRB. Under these circumstances an employer who wants to appeal their experience modification calculation must submit a written request for review to the PCRB together with all information in support of the employer's appeal. PCRB staff will review the request, often in conjunction with senior management. Depending upon the results of this review, the employer's original experience modification will be reaffirmed, revised or withdrawn with an accompanying explanation establishing the basis for that decision. The decision is considered the final decision of the PCRB. If the employer remains aggrieved by this final decision, the employer has the right to present its appeal to an Appeals Subcommittee of the Classification and Rating Committee, a body equally comprised of employer and insurer members. A further appeal of a decision of the Appeals Subcommittee may be taken to the Insurance Commissioner but only after the employer has first exhausted all its other appeal rights under PCRB rules.
HOW DOES A CHANGE IN OWNERSHIP AFFECT EXPERIENCE RATING?
Ownership information plays an important role in the experience rating process. Experience rating can be affected by ownership changes such as sales, mergers, acquisitions and establishment of a trustee or receiver. Under PCRB rules the use of experience of an entity undergoing a change in ownership to compute experience modifications is continued unless there has been a substantial change in operations or employees at the time of the change (see "Are There Exceptions to the Rule of Continuing Use of Experience After A Change in Ownership?"). The concept behind continuing use of experience after a change in ownership is that the experience of a particular business is affected in large part by the labor force employed and by the operations and the hazards involved in the enterprise being conducted. Therefore, past experience generally continues to be a valid and appropriate estimator of future experience despite a change in ownership.
ARE THERE EXCEPTIONS TO THE RULE OF CONTINUING USE OF EXPERIENCE AFTER A CHANGE IN OWNERSHIP?
Yes. When one or both of the following conditions are met, the changes noted are deemed to be "substantial" and experience prior to the ownership change is not used in future experience ratings for the entity in question.
The PCRB must be made aware of all changes in ownership, entity status and name changes, as well as the addition of a newly formed or previously separately insured entity to an existing policy. The PCRB requires that an ERM-14 Confidential Request for Information form be submitted to verify these types of changes. The PCRB staff will make a careful review of the information and communicate findings to the carrier of record.
WORKPLACE SAFETY AND ITS EFFECTS ON EXPERIENCE RATING
For workers compensation purposes businesses are assigned to one or more of over 300 risk classifications. While different industries may experience very different levels of losses and are generally subject to different classifications, considerable differences in experience also exist between businesses within any given classification. Conditions such as a company's size, physical characteristics and the commitment of management to workplace safety are all factors which may affect an employer's workers compensation loss experience. The experience rating formula uses employers' exposure and loss data to measure how their performance has compared to other employers subject to the same classification(s). By implementing loss control programs and educating employees about accident and injury prevention, employers can often decrease their experience modifications over time and thereby decrease their workers compensation premiums.
CERTIFIED SAFETY COMMITTEE CREDIT PROGRAM
As a further incentive to workplace safety, Pennsylvania offers a five percent Certified Safety Committee Credit Program to employers. Interested parties should contact the Department of Labor & Industry, Bureau of Workers Compensation, Room 1402, 7th and Forster Streets, Harrisburg, PA 17104-2501, or call (717) 772-1635 to learn more about this program.
MERIT RATING PLAN
Many employers are not large enough to qualify for experience rating. The Merit Rating Plan was formulated to be responsive to the loss experience of these smaller businesses. This plan is based on accident experience over a two-year period and provides a five percent premium credit to employers with no lost-time claims. Employers with two or more lost-time claims receive a five percent premium surcharge. Employers with exactly one lost-time claim receive neither a premium credit nor a premium surcharge. As a result of this program, incentives to operate a safe workplace apply to small businesses, providing such safety-conscious employers with opportunities for premium savings based on good performance.
PENNSYLVANIA CONSTRUCTION CLASSIFICATION PREMIUM ADJUSTMENT PROGRAM ("PCCPAP")
The PCCPAP program provides premium credits to high wage paying employers in the construction classifications. These credits are funded by loadings in manual rating values for those classifications.
Questions regarding the information in this brochure or other Pennsylvania workers compensation system subjects should be directed to the following extensions at the PCRB.
Copyright © 1996